With 2024 in full swing, February is the ideal time for franchisors to start the Franchise Disclosure Document (FDD) renewal process. Let’s discuss why.
Franchisors are required by federal and state law to prepare an FDD. Its 23 items provide necessary information to franchisees enabling them to make informed decisions on purchasing the franchise.
Preparation of the FDD is not a one-time event and it must be updated annually. Although applicable laws and regulations vary, the update generally must occur within 120 days after the franchisor’s fiscal year end. If the end of your fiscal year coincided with the end of the calendar year, then April is your deadline to update your FDD.
Commonly Updated FDD Items
While all 23 items in the FDD may not be affected during renewal, there are some that require annual disclosures.
Item 8 is a good starting point. If the franchisor derived revenues from required purchases or leases by franchisees in the prior fiscal year, then Item 8 must disclose:
- The franchisor’s total revenue
- Its revenue from all required purchases and leases of products
- And the percentage of the franchisor’s total revenues from the required purchases and leases.
Item 7 is also typically updated annually, as it requires franchisors to set out in a prescribed tabular format a franchisee’s estimated initial investment – i.e., the estimated costs for a franchisee to commence business. As costs for items such as equipment, rent and other inventory typically increase each year, due to inflation or otherwise, Item 7 should be reviewed and updated to reflect those changes.
Item 7 requires accuracy because making mistakes in these numbers can make it harder for the franchisor to sell the franchise, and may result in legal liability.
Item 20 must also be updated every year. Hopefully you will have sold franchises in the prior fiscal year and in Item 20, you will note the number of franchised units and company-owned units in existence for the prior three years.
Item 20 must also be updated each year to provide franchisees with contact information for current and former franchisees. Assuming you have had positive and profitable relationships with your franchisees, the updates to Item 20 will likely be an effective (yet subtle) marketing tool.
Other FDD items must be updated if there has been a material change in the disclosure. For instance, Item 3 discloses lawsuits involving the franchisor. This includes whether the franchisor or any of its predecessors, certain affiliates and any of the individuals listed in Item 2 of the FDD, have been convicted of certain crimes or have been found liable – or settled lawsuits – relating to the franchise relationship.
Item 3 also includes franchisor-initiated lawsuits filed against franchisees in the prior year. If any such lawsuits were commenced in the prior year, Item 3 will have to be updated.
Franchisors must also include their audited financial statements as part of the updated FDD. Audits do not happen fast, so starting the process now is the ideal strategy.
These are just some of the disclosures in the FDD that require annual updating. A qualified NY Franchise Lawyer can help you with the renewal process.
A Note On Franchise Agreements
The renewal process is also a good time for franchisors to review the language and terms of their franchise agreement.
The franchise agreement is the contract which sets forth the terms that will govern the relationship between the franchisor and franchisee. It identifies the parties’ rights and obligations during the franchisee’s ownership and operation of the franchise. The agreement also describes certain post-termination rights and obligations.
Since franchisors are already incurring costs and time to update the FDD, the renewal process is also a good time to review the franchise agreement and make changes to reflect lessons learned from the prior year.
Reviewing The Lawyer-Client Relationship
Franchisors should also use this time of year as an opportunity to reevaluate the relationship with their franchise lawyer. Reflect on the past fiscal year and your engagement with your franchise attorney when you needed guidance:
- Who led the dialogue on updating the FDD?
- Was the attorney responsive and accessible when you called or emailed?
- Is the lawyer is doing everything possible to help you succeed?
If you are nonplused by the answers, then perhaps it is time to start fresh with another New York franchise lawyer.
Additional core qualities of a qualified attorney include a successful track record, an online presence and solid reputation among the legal community.
If the end of your fiscal year coincided with the end of the calendar year, then April is the deadline to update your FDD with your NY Franchise lawyer. Time is now of the essence because the renewal process may be time-consuming and complex.
Your NY Franchise Lawyer
The tips above are just some of the reasons why a legal review of your FDD is a strategic investment. It will help ensure you comply with applicable laws and have the necessary terms to safeguard the interests of your franchise system.